As the apartment investment market navigates through 2025, a new normal is emerging, shaped by the lingering effects of high interest rates and evolving economic conditions. Namely, the apartment investment market is experiencing a gradual thaw after years of stagnation, according to Simon Herrmann, SVP at PearlX, an energy infrastructure and capital company. "While investors remember the days of 3% interest rates, there is now a growing acceptance that those numbers aren't returning anytime soon," he told GlobeSt.com. This acceptance is spurring increased activity, as investors seek to put their capital to work rather than leaving it idle.
However, the high interest rate era has left its mark on the industry. Projects and purchases made during the last three to four years are facing particular strain. "For many investors, the pro formas prepared in 2021 really didn't anticipate today's borrowing costs. That led to strained cash flows and difficult refinancing scenarios," Herrmann points out.
Despite recent Federal Reserve rate cuts, the market isn't expecting a dramatic drop in rates. "To prepare for 2025, investors need to really be ready for a market where borrowing costs remain higher than they were in the low-rate era,” Herrmann said. This new reality requires careful attention to underwriting and a willingness to accept potential equity losses.
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Looking ahead, Herrmann anticipates a significant uptick in market activity for 2025. "The capital is ready, and many groups are finishing up funds they raised previously and deploying that money," he stated. However, he cautions that while investor appetite is growing, finding value in the current market remains challenging.
Value-add strategies are also evolving in response to market conditions. Herrmann predicts a shift towards more conservative approaches: "I anticipate more modest updates where operators make smaller tweaks and watch how the market reacts." He also highlights the potential of sustainability-focused improvements, such as solar panels and EV chargers, as ways to add long-term value with less risk.
Meanwhile, the fundamentals of the apartment market remain strong, with high demand from renters. However, affordability has emerged as a major challenge. "Inflation continues to impact everyone, and the cost of supplies for builders has not eased. At the same time, buying a home is becoming increasingly difficult and all of those factors are forcing more people into the rental market," Herrmann explains.
This increased demand, however, doesn't necessarily translate to aggressive rent increases. Herrmann warned: "Apartment owners are finding it harder to raise rents as aggressively as before because renters are financially stretched and feeling the strain of the economy."
New apartment development faces significant hurdles in 2025. Labor shortages, high construction costs, and stricter lending conditions have combined to slow the pace of new starts. Herrmann points out, "If you're not an experienced developer with a proven team, securing a construction loan can be nearly impossible—it's a classic catch-22."
Insurance costs have also become a major concern, particularly in states like Texas and Florida. "For some development projects, these insurance challenges can be dealbreakers," Herrmann cautioned.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
